Any stipulation, direct or indirect, that tax liability ought to be discharged first without utilising available credit is incompatible with the concept of GST.
There is nothing unique about the model GST law except for the concept of Electronic Credit Ledger System (ECLS), programmed to capture transaction data, assessee-wise. The objective underlying the module is to develop a self-monitored system for the assessee to enter his transaction data in the electronic ledger, which will be accessible to the tax collector for cross-verification, as also his supplier/buyer concerned. This system would not only help in tax compliance, but would also prevent availment of inadmissible credit, thereby eliminating tax disputes to a large extent. While the ECLS is generally welcome by the stakeholders, the model law that introduces it is found to be seriously flawed.
Although the ECLS is somewhat comparable to the IT system of capturing tax deducted at source (TDS) and simultaneous credit to the payee’s TDS account (known as 26AS Form), the ECLS appears to be much more complex and challenging. It is especially so given the fact that unless the complete transaction data showing all relevant details of the inputs, inter alia, including the amount of GST paid, is duly entered electronically by the supplier/service provider and sent to the recipient’s ledger, the recipient of the inputs shall not be able to take or avail GST credit.
According to the model GST law, entry of the transaction data by the supplier happens to be one of the preconditions for taking credit. Delay in entry will lead to delay in utilisation of credit. There is no such precondition in the current CenVAT and State VAT regimes. In other words, an assessee at present is able to take credit immediately upon receipt of inputs along with the invoice showing amount of the duty/tax payable or paid. In the GST regime, such availment is likely to be delayed at least by a month, if not longer, owing to the precondition that there must be evidence of tax payment by the supplier. A number of preconditions have been stipulated in the model law for the purpose.
Clauses (c) and (d) of section 16(11) provide that “no registered taxable person shall be entitled to the credit of any input tax in respect of any supply of goods and/or services to him unless: (c) the tax charged in respect of such supply has been actually paid to the credit of the appropriate government, either in cash or through utilisation of input tax credit admissible in respect of the said supply; and (d) he has furnished the return under section 27.”
On a plain reading of this provision, it is clear that the onus has been placed on the taxable person to establish, before taking credit, that his supplier has actually paid the tax on the goods supplied.
Additionally, he (the taxable person taking credit) has to also furnish the return under section 27. The above two conditions are non est in the existing laws.
It is also queer and inexplicable why those two preconditions have been provided when the ECLS is supposed to contain all relevant data relating to each transaction, making it well nigh impossible for an assessee to evade tax or to take inadmissible credit without detection.
Though not clearly spelt out in the model law, it can be reasonably assumed that the ECLS would, inter alia, contain the amount of tax paid to the Treasury against each supply, with challan details (just like in the case of 26AS statement). There may be a situation when the supplier uploads the supply details in the ECLS immediately upon the supply and the details of the tax paid for the goods or service in the following month or later, involving a time lag of a month or more. As per the above provision, the recipient of the supply shall be eligible for credit not on the date of receipt of goods—as per the present practice—but on the date of the payment of tax, as shown in the ECLS. This can result in considerable delay in credit-utilisation, which is bound to have an adverse impact on investment in general. Credit-availment may be further delayed owing to the additional precondition of the filing of the monthly/quarterly return.
It is doubtful whether the trade is in readiness to comply with the mandatory requirement of uploading the inward and outward supply data in real time, failing which the credit channel is likely to be choked, leading to a cash crunch, neither envisaged, not experienced yet. Ideally, therefore, the recipients of inputs should be entitled to credit as soon as the corresponding supply data has been uploaded by the supplier in the ECLS, irrespective of the date of tax payment, which, in any case, cannot be avoided under strict monitoring by tax administrators. Similarly, the precondition of the filing of return may also be de-linked from credit entitlement.
Section 28 of the model law also appears to be fundamentally flawed. It provides that the taxable person shall be entitled to take credit of input tax, as self-assessed, in his return provisionally, subject to the proviso that he shall not be allowed to utilise such credit till he has furnished a valid return and also discharged his self-assessed tax liability. However, there is no clarity whether the tax liability discharged would be inclusive of the credit provisionally taken. If it does, the above proviso is clearly redundant. If it does not, then such a precondition is clearly impracticable, if not self-contradictory, inasmuch as in the scheme of GST a taxable person cannot be forbidden to pay tax from his credit account. Any stipulation, direct or indirect, that tax liability ought to be discharged first without utilising available credit is incompatible with the concept of GST. Besides, section 28 provides an additional precondition for credit-utilisation, over and above what is already provided in sub-section (11)(C) of section 16. For foregoing reasons, section 28 may be deleted.
The author, an advocate, is former member, Central Board of Excise & Customs